Network and method for trading derivatives

ABSTRACT

A computer network and method for electronically trading derivatives. The system includes networks and methods where a control or network managing station in the network acts as a facilitator for the market makers and subscribers to make a trade at an Exchange. In another embodiment the network managing station consummates the trade between a market maker and a subscriber by matching binding quotes and orders and clears the trade at an Exchange. The computer network for electronically trading derivative comprises: (a) network managing station; (b) one or more market maker stations; (c) one or more subscriber stations; (d) one or more Exchanges. The network managing station connects market makers and subscribers for making real time indicative quotes, issuing requests for quotes, obtaining binding quotes and wherein the market maker and subscriber are in communication with an Exchange for sending binding quotes and orders to the Exchange for clearing and confirming transactions.

REFERENCE TO RELATED APPLICATIONS

This application is a continuation under 37 C.F.R. §1.53(b) of U.S.patent application Ser. No. 11/865,534, filed Oct. 1, 2007 (AttorneyDocket No. 4672/651) now U.S. Pat. No. ______, the entire disclosure ofwhich is hereby incorporated by reference, which is a continuation under37 C.F.R. §1.53(b) of U.S. patent application Ser. No. 10/001,237 filedOct. 20, 2001 (Attorney Docket No. 4672/363) now U.S. Pat. No.7,337,140, the entire disclosure of which is hereby incorporated byreference, which claims the benefit of the filing date under 35 U.S.C.§119(e) of U.S. Provisional Application Ser. No. 60/244,311 filed Oct.30, 2000, which is hereby incorporated by reference.

FIELD OF THE INVENTION

The invention is in the field of electronically trading derivatives.

BACKGROUND

Electronic trading is revolutionizing the futures industry. For example,future contracts in Europe are 100% electronically traded. Trading offutures contracts in the United States will almost certainly be doneelectronically in the very near future. Five weeks after launch of thea/c/e electronic platform at the Chicago Board of Trade Exchange (CBOT)25% of financial futures trades were made electronically. The rapidgrowth of electronic trading is further illustrated by the fact that theGerman-Swiss Exchange (EUREX) founded in 1990 has surpassed the CBOT asthe leader in futures trading.

There are substantial limitations of current ‘mainframe’ electronictrading systems. Designed more than a decade ago, electronic futurestrading platforms are based on rigid, outdated ‘mainframe’ architecture.All message traffic passes through centralized Exchange servers.Communication is ‘one-to-all’ and ‘all-to-one’, i.e. every price updatetriggers thousands of messages. Users are unable to flexibly query themarket for indicative quotes for ‘wholesale’ orders or customized spreadcombinations. While ‘mainframe’ architecture works for futures tradingwith a single price point, it fails completely in markets that are‘relational’, i.e. every price is linked to other—or hundreds ofother—prices. This problem is illustrated by the relationship ofE-futures, E-options and E-spreads.

Outright E-Futures have a single price point. As the futures pricechanges, traders cancel, modify and replace single orders. This isillustrated in Table 1.

TABLE I 30-Year Bond Futures Book Contract - December 2000 BIDS ASKSQuantity Price Price Quantity 350 98.21 98.22 220 250 98.20 98.23 150300 98.19 98.25 400

Options involve puts and calls and combinations of puts and calls and/orfutures, as well as straddles, strangles, butterflies, strips, etc. allof which result in thousands of price points being linked to eachfuture. Thus, as the underlying futures price moves, thousands of priceupdates are needed. This is illustrated in Table II.

TABLE II 30-Year Bond Options Book Contract - December 2000 BIDS ASKSInstrument Strike Quantity Price Price Quantity Call 9800 200 130 136100 Call 9900 150 55 63 50 Put 9800 50 47 52 250 Put 9700 175 28 31 300Straddle 9600-1000 200 55 58 150 Call Spread 9800-1000 250 25 26 50

There are few ‘real’ prices displayed for options and spreads onelectronic screens because market makers cannot make tight marketsacross numerous price points. As the futures price moves, ‘stale’options and spread prices remain exposed to the market.

E-Options and E-Spreads require a blend of indicative and bindingquotes. On a trading floor a trader has only one voice but quotes acrosshundreds of options and spreads. A trader makes continuous indicativequotes issuing hand held sheets with a grid of theoretical values. Atthe moment of trade, the indicative quote is ‘refreshed’ and becomesbinding.

Current electronic options and spread markets have significantdisadvantages. In the United States, despite the rapid growth ofelectronic futures, there is no real volume in electronic options andspreads. These markets still trade on the floor. In Europe, wherefutures markets are 100% electronic, price discovery in options andspreads takes place manually in an informal “cash” phone market. TheEuropean ‘phone market’ is widely disliked by all participants exceptthe “cash” brokers who charge commissions to both sides of a trade.European options screens do not show ‘real’ prices. End users complainof the lack of transparency (only the “cash” brokers know the real bidsand offers) and the inability of end users to verify that orders havereceived ‘best execution’ treatment. Users and market makers also do notlike the high cost of “cash” brokerage. Brokerage costs for marketmakers are passed on to users in the form of wider bid—ask spreads.Exchanges, regulators and end users are concerned by the counterpartyrisk inherent to the system. Finally, market integrity rests on theperformance guarantees of unregulated, thinly capitalized “cash”brokers.

U.S. Pat. No. 6,016,483 describes a computer-based system fordetermining a set of opening prices for options traded on an optionsexchange and for allocating public order imbalances at the opening oftrade. This patent is incorporated by reference in its entirety.

SUMMARY

The invention is directed to a computer network and method forelectronically trading derivatives. The invention includes networks andmethods where a control or network managing station in the network actsas a facilitator for the market makers and subscribers to make a tradeat an Exchange. In another embodiment the network managing stationconsummates the trade between a market maker and a subscriber bymatching binding quotes and orders and clears the trade at an Exchange.The computer network for electronically trading derivative comprises:(a) network managing station; (b) one or more market maker stations; (c)one or more subscriber stations; (d) one or more Exchanges.

The network managing station connects market makers and subscribers formaking real time indicative quotes, issuing requests for quotes,obtaining binding quotes and wherein the market maker and subscriber arein communication with an Exchange for sending binding quotes and ordersto the Exchange for clearing and confirming transactions.

The method and network of the present invention provides for continuousquotes on the user's desktop that are backed up by significantliquidity. Numerous markets can be quoted simultaneously and users canmake custom inquiries. The best price is guaranteed because the executedorder matches the best price in the Exchange. The method and apparatusdescribed herein enables liquid and efficient electronic trading ofexchange listed products, thereby reducing risks associated withalternative over the counter mechanisms. That is, the system providesboth the flexibility inherent in over-the-counter (OTC) trading and thereduced risk of Exchange matching and/or clearing. The system isunexpectedly advantageous in that it integrates, in real-time, marketmakers' indicative and binding quotes.

BRIEF DESCRIPTION OF THE DRAWINGS

FIG. 1 is a schematic of the overall network (LD network);

FIGS. 2A and 2B are flow diagrams of the interaction on the network ofthe market makers and a subscriber;

FIG. 3A is a schematic of a computer screen seen by a subscriber;

FIG. 3B illustrates the subscriber's query selection screen;

FIG. 3C illustrates a subscriber order ticket screen;

FIGS. 4A, 4B and 4C illustrate the market maker control screens;

FIG. 5A illustrates an individual market maker's indicative quotes andthe best LD indicative quote; and,

FIGS. 5B and 5C illustrate embodiments of the market maker's bindingquote ticket.

DETAILED DESCRIPTION OF THE DRAWINGS AND PRESENTLY PREFERRED EMBODIMENTS

FIG. 1 illustrates the network and interactions of market maker,subscriber, network manager and Exchanges. MM1, MM2, MM3, and MM4 aremarket maker servers that provide indicative and binding quotes. Sub 1,Sub 2, Sub 3 and Sub 4 are subscriber stations through which subscribersquery indicative quotes, request binding quotes, and send orders toExchanges such as the CBOT, CME and Eurex. LD is a network managingstation that provides a directory of participants receiving or providingquotes. The network manager in one embodiment facilitates tradingbetween subscribers and market makers who submit binding quotes andorders to an Exchange for clearance. In another embodiment, the networkmanager (LD) or control station may match the binding quotes and ordersand send them to an Exchange for clearance. Through this network, marketmakers, subscribers, Exchanges and the network managing station canelectronically communicate with each other. Subscribers can directly andflexibly query market makers' databases. The network minimizes trafficthat passes through centralized servers and therefore has a highcapacity. Messaging traffic of price updating is thereby reduced bylimiting quote traffic to interested parties who query specificcontracts and/or contract combinations.

A subscriber station (Sub 1, Sub 2, Sub 3 and Sub 4 of FIG. 1) hashardware and software to query indicative quotes, request bindingquotes, and send orders to Exchanges. In one embodiment, the subscriberstation consists of a Windows-based PC running an application thatallows users to login, select symbols, and receive quotes for thosesymbols. Other embodiments include hand held computing devices that runthe applications. Alternatively, the hand-held device acts as a wirelessdata terminal that communicates with the PC running the applications. Asone of ordinary skill can appreciate, further alternatives hardware andsoftware arrangements include hand-held devices and PC workstations,wherein the software functionality is appropriately divided between thetwo devices.

In another embodiment, the subscriber station is a gateway applicationconnecting a subscriber's internal network to the network also referredto as the (LD) network. In this case, the functions of the subscriberstation are controlled by other applications running throughout thesubscriber's internal network. These applications may be tradingfront-ends or trading programs that the subscriber wishes to use toaccess the LD network. In this case, the LD subscriber gateway providesa protocol for passing messages between the networks. These messagesinclude querying indicative quotes, quote updates, requesting bindingquotes, and routing orders.

FIG. 3A illustrates an example of the Market Overview screen thatdisplays indicative quotes for symbols and combinations of symbols aswell as binding quotes in the Exchange order book. The CBT Bid/CBT Askcolumns display the current best bid/ask price and quantity in the a/c/eelectronic order book. The LD Bid/Ask columns display the bestindicative bid/ask, size, and volatility from the market makers on theLD network. The screen of FIG. 3A displays real time price updates forsymbols selected by the user via selection screen of FIG. 3B.

FIG. 3B is an example of the screen that allows the user to selectsymbols and combinations of symbols for which quotes will be requested.The selected symbols and the corresponding requests for indicativequotes provide an “indication of interest” or IOI to the market makers.Symbol Selection is performed as follows: highlight a symbol in the leftcolumn and use the button to move it to the view list, thereby making itan active symbol. Double-clicking a symbol also makes it active.Preferably, typing a value in the ‘Symbol List Filter’ box limits thecontent of the list—for example, typing ‘OZB VI’ displays the availablethirty-year October options.

Selecting a spread is performed by highlighting a spread in the rightcolumn and then using the button to make it active. Double-clicking aspread also makes it active. The three drop-down boxes in the centerfilter the list of spreads by product, month, and Call or Put. Thespreads can also be filtered by selecting the spread type from thedrop-down over the right column

Removing an item from the view list is done by double-clicking an itemin the view list or highlighting the item and using the ‘remove’ button.Ordering the display is done with the ‘sort’ button, which causes theitems in the view list to be sorted by symbol, expiration date, andstrike. Individual symbols can be selected and moved up and down using‘up’ and down.

Depending upon the hardware, software, and network conditions, thesubscriber station may actively query market makers for updated quotes(every second, for instance, or when the underlying price moves). Inother circumstances, the subscriber station receives quote updates inreal-time (i.e. ‘pushed’ by the market makers).

In one embodiment, when a user wishes to enter an order against one ofthe indicative quotes, double clicking the symbol pulls up an orderentry window as shown in FIG. 3D (or FIG. 3E in the case of a straddle).Pressing the “sell now” button simultaneously informs the appropriatemarket maker of the request for a binding quote and submits thecorresponding order to the exchange.

In yet another embodiment, the invention provides for unilateralcommunication in accordance with CFTC rules between subscribers andmarket makers for the submission of binding quotes and orders as aresult of the unilateral communication. For example, a subscriber mayreceive an indicative quote from a market maker and respond by sending arequest for quote (RFQ) to an Exchange, alerting all market participantsof the RFQ. Thus, the market maker receives an RFQ from a subscriber atthe same time the RFQ is received by other market participants. Themarket maker may immediately enter a binding quote at the Exchange andthe subscriber may immediately enter an order at the Exchange.

In a further embodiment, the process of entering an order and tradingwith the LD network is a two-step process. The user first enters an RFQthat is sent to the LD market makers as well as to the Exchange (e.g.,a/c/e, which is the CBOT electronic trading platform). After marketmakers enter their quotes into a/c/e, the user enters an order to matchagainst the best bid (or ask) in the a/c/e book.

Thus when a user wishes to enter an order against one of the indicativequotes, the user preferably double-clicks the symbol (or by clicking onthe bid or the ask price) in the display of FIG. 3A to activate aRequest For Quote (RFQ) window as shown in FIG. 3C. The quantity may beleft blank, or a value may be specified. Clicking send button sends theRFC simultaneously to the Exchanges, which effectively may result insending the RFC to 30,000 terminals, and also sends the RFC to the LDnetwork to the LD market makers. The RFC sent to the exchange preferablyconforms to existing RFC exchange formats and would typically includeonly the contract of interest. In contrast, the RFC sent to the LDmarket makers preferably includes the contract of interest, theindicated price and the indicated quantity. Alternatively, the LD RFQmay also include additional parameters such as what side the requestedquote is for (buy/sell). Upon sending the RFQ, the RFQ window of FIG. 3Cis replaced with the Order Entry Screen of FIG. 3D (or FIG. 3E in thecase of a straddle).

The order ticket shown in FIG. 3D allows the subscriber to change thequantity, price, and buy/sell. The subscriber can also select theappropriate account from a drop down list. After confirming the details,the order may be submitted. Preferably, the subscriber awaits anindication from the market maker that a binding quote has been submittedprior to submitting the order. This indication appears in the “CBT Bid”and/or “CBT Ask” fields of the Order Entry screen shown in FIG. 3D (orFIG. 3E). Such indication that a binding quote has been submitted is anadvantageous feature of the system described herein.

Specifically, the market maker station preferably displays the quoteentry screen of FIG. 5B in response to the receipt of an LD RFQ sent bythe subscriber. FIG. 5C depicts an alternative quote entry screen. Thequote entry screen, upon display, has been “loaded” or preprocessed toincorporate data from the market maker's indicative quote, including theprice and depth (volume of contracts). In a farther preferredembodiment, the loaded ticket may incorporate updated quote data basedon more recent market data (such as changes to the price of theunderlying instrument, or volatility). The quote entry screen therebyfacilitates the market maker's entry of a binding quote in accordancewith the market maker's indicative quote or an updated quote. Upon themarket maker's submission of the quote and its receipt by the exchange,the subscriber's order entry ticket of FIG. 3D (or FIG. 3E) will beupdated to reflect the binding quote data. The subscriber can thendecide whether to submit the order after having evaluated the specificvalues (i.e., bid/ask and volume) associated with the binding quote.Preferably, all LD orders are IOC (Immediate or Cancel) or FOK (Fill orKill). This means orders will either execute or cancel, and orders willnot post to the book.

FIGS. 2A and 2B illustrate the interaction of the parties through thenetwork by way of flow diagrams 200 and 250. Market makers, for exampleat station MM2 and MM4 of FIG. 1, connect to the network managingstation (LD) to indicate quotable markets; At step 210, Subscriberstation, e.g. Sub 3, provides and indication of interest by querying thenetwork managing station for specific trading products and receives theaddress of market makers, for example, MM2 and MM4, and requests andreceives indicative quotes. If the network managing station LD pushes anew futures price, this may be used to trigger Subscriber Sub 3 to queryfor updated quotes from market makers MM2 and MM3. As discussed above,other triggering devices may be used to cause subscribers to requestupdated quotes. For example, quotes may be requested at periodicintervals. The period may be a predefined period set by the subscriber,or may be adjusted up (or down) automatically in response to variousother factors. Typical factors may include high (low) volume, high (low)volatility, or even an indication from the subscriber that an RFQ and/ororder may be imminent. This indication may be by way of a screenactivated button or similar subscriber input.

At step 210 in the process, a subscriber such as Sub 3 issues a requestfor quote (RFQ). The subscriber may then selectively submit an order instep 240, or preferably, may first await the completion of the optionalstep 230, which is the receipt of an indication that the market makerhas submitted a binding quote.

With respect to FIG. 2B, the market maker's involvement is depicted inflow diagram 250. At step 260, the market maker receives an indicationof interest from a subscriber and responds by providing one or moreindicative quotes. Upon receipt of an RFQ, which is interpreted as arequest for a binding quote in step 270, the market makers, for exampleMM3 and MM4, may respond by selectively sending a binding quote to anExchange, or directly to the LD. In this way the network provides forelectronic communication between market maker, subscriber and Exchangeswith the assistance of a network managing station LD so that asubscriber can query market maker, initiation indications to trade,receive responses to indications to trade, issue binding quotes andforward binding quotes to an Exchange. The subscriber can send orders toan Exchange that can be electronically matched and cleared by anExchange. In the alternative, the network managing station may matchbinding quotes and orders and clear the trades at an Exchange.

As discussed above, requests for binding quotes result in an updatedbid/ask quote being sent to the Exchange. During this process, tradingparameters under the control of the market maker are accessed to ensurethat trading remains under the control of the market maker. In certaincircumstances, the market maker may decline to submit a binding quote,or may change his quote from that displayed on the subscriber screen asindicative.

Specifically, a market maker station preferably has hardware andsoftware to provide indicative quotes for subscribers and binding quotesto be sent to Exchanges. The options' theoretical values from which thequotes are derived are calculated using industry standard algorithms,namely the Black-Scholes Model and for certain instruments the AmericanWhaley Model. Components of the quote are the bid price, bid quantity,ask price, and ask quantity. Additionally, the market maker calculatestwo sets of prices, one with a narrow spread (or range between the bidand ask), and one with a wider spread. This allows the market maker toswitch between narrow and wide spreads during the trading day inresponse to market activity. Bid price and ask price are determined bydecreasing (for bid) and increasing (for ask) the theoretical value by avariable amount that depends on various risk parameters, as follows:

N and W are parameters maintained by the market maker to determine thenarrow and wide spread values; FV is the fair value of the option ascalculated by the above-mentioned standard pricing models; V is Vega, ameasure of the rate of change in an option's theoretical value for aone-unit change in the volatility of the underlying. Vega is an outputof the standard pricing models.

Then, the bid and ask prices for the quote (B, A) are calculated asfollows:

B(narrow)=FV−V*N

B(wide)=FV−V*W

A(narrow)=FV+V*N

A(wide)=FV+V*W

Quantity for the quote is calculated by taking four variables maintainedby the market maker for each options month and using the Delta and Vegaof the individual option symbol to calculate the quantity across therange of options strike prices, as follows:

Q=max [Q _(min), min[Q _(max) , D _(max) /D, V _(max) /V]],

where Q_(min) is the minimum quantity, maintained by the market maker;Q_(max) is the maximum absolute quantity, maintained by the marketmaker; D_(max) is the maximum quantity in terms of aggregate Delta,maintained by the market maker; V_(max) is the maximum quantity in termsof aggregate Vega, maintained by the market maker; D is Delta, a measureof the rate of change in an option's theoretical value for a one-unitchange in the price of the underlying security, and is an output of thestandard pricing models; and, V is Vega, as defined above.

In one embodiment, the market maker station consists of a databasecontaining pricing data from which quotes (both indicative and binding)are determined in response to a subscriber request. The parameters ofthis database are controlled by screens similar to FIGS. 4A, 4B and 4C.

The market marker generates a matrix of bid and ask prices andquantities at different volatilities and underlying prices that coverthe expected short-term movement of the market. This matrix is accessedto provide indicative quotes, based on the current volatility (ascontrolled by the market maker) and the underlying price (usuallyprovided by the appropriate Exchange in a data feed). Market makers‘tweak’ their bids and asks by changing their volatility levels. Theycan also pull (revoke) their quotes, either individually or by product,as well as send in new arrays at any time.

The “Sheets” screen of FIG. 4A allows the market maker to calculateimplied volatilities, Bid, Fair and Ask values and the Quantity, given afew inputs. The market maker may select an option from the drop-down boxin the upper left corner (Future and Days Left boxes fill inautomatically once option is chosen). To plot a new curve, the marketmaker enters strikes and prices for the option chosen. The table at thetop of the Sheets window is used to enter strikes in decimal formatCorresponding prices are entered using tick format. The put price issued for the ATM strike. Other fields for the option chosen are entered.The slope is defined as (change in implied volatility)/(change instrike); 0.15 is a typical starting value for Call Slope and Put Slopewhich determine the curve's shape in the wings.

The market maker enters the Interest Rate, Futures (price in tickformat) and Date, which can be any date as long as the entries made forstrikes, prices and call/put slopes correspond to this date. The entriesfor the Display Quantity and Bid/Ask Spread fields (to be associatedwith the second Date) are completed, as well as the Min and MaxContracts. This will be used to limit the quantities shown on the Sheetsscreen and the Tweak screen of FIG. 4B. (Example: 100 Min and 500 Maxwill keep quantities between 100 and 500 regardless of quantitymultiplier).

The market maker enters (in decimal format as a fraction of a tick) thewidth Of the preferred bid/ask spread. Vega preferably does not affectthis calculation. (For example, entering 0.25 is a quarter tickabove/below fair value for Bid/Ask). The market maker then enters (inticks) the Max Ticks and Min Ticks allowed as the difference between thebid and the ask. The second Date, Future Bid and Future Ask (prices intick format) are entered for which desired calculations are made in thelarge table below the graph. Then, the market maker selects Narrow orWide to choose from the two sets of Bid/Ask Spread values that have beenentered.

Finally, the market maker selects the “Calculate” button, resulting innew calculated values being entered in the large table. The Call Slopeand Put Slope may be adjusted as necessary to obtain a suitable fit onwing prices in the table, followed by a recalculation to check tableprices. Further, the parameters for the graph may be adjusted, includingMin Strike, Max Strike, Min Vol and Max Vol. Selecting “Reset GraphScale” applies the new choices to the graph. Entries made on the Sheetsscreen may be saved by selecting the “Save Profile” button (publishingis not required in order to save).

To publish, the market maker may select a future price range for whichto publish by entering future prices (tick format) in the High and Lowfields (preferably keeping this range at 4 points or less to keeppublishing times down). The market maker then selects either full (0.01)or half tick (0.005) increments. For Volatility Range, the market makerenters a High, Low and volatility Increment at which to publish, andchooses an increment of at least 0.05 and Volatility Range of at most 1%for High and Low to avoid long publishing times. “High” represents thepercentage that volatility will go up and “Low” represents thepercentage that volatility will go down for this publishing period. Theaction is completed by clicking the “Publish” button. Data will be savedin a temporary table which can be made “Live” using the “Tweak” screenof FIG. 4B. If there is any existing temp data, a pop-up box will askthe user if this data should be overwritten. All data entry is saved asthe profile “Last Published.”

The Tweak screen is depicted in FIG. 4C, and is used to modify published“live” values (values that are being broadcasted to customers via MarketOverview) without republishing. Once an option is published, Tweakcontains temporary (Temp) data that may be modified by changingvolatilities; once these changes are made, they can be applied to livedata.

Depending on hardware, software, and network conditions, subscriberrequests for indicative prices are treated either as a query whichresults in a single set of indicative quotes to be sent to thesubscriber (every second, for instance, or when the underlying pricemoves), or as a request for continuous updates (i.e. ‘pushed’ by themarket maker). For a request for continuous updates, the market makerstation monitors the underlying price and other factors that determinethe indicative quote and ‘pushes’ a new indicative quote to thesubscriber when necessary.

When a subscriber requests a price, the database process preferably usesthe current futures price and market maker-specified volatility level todetermine the current bid and ask for each market maker. The best price(highest bid and lowest offer) is then sent out to the subscriber. Iftwo or more market makers are indicating the same price, the quantity isaggregated accordingly. The effect of this approach is to provide thesubscriber with tighter and deeper markets due to the aggregation ofcompetitive quotes from multiple market makers.

In another embodiment, the market maker stations generate indicativequotes for structured futures products, such as those traded in theChicago Mercantile Exchange's Eurodollar complex or the London FinancialFutures Exchange's Euribor complex. These products are characterized bythe trading of several futures grouped as a single transaction. Theseare known generically as strips, and the CME further defines them aspacks and bundles. A pack, for example, is the simultaneous transfer ofone contract each of four consecutive futures months. Bundles involvethe transfer of one contract each of four, eight, 12, or 16 consecutivefutures months. As with options, indicative quotes are generated by themarket maker stations and transmitted to subscribers. Subscribers thenrequest binding quotes, and send orders into the exchange to matchagainst the market maker's responses to those requests.

FIG. 4C shows the “Efuture” screen, which serves as an electronic eye toobtain Bid and Ask prices for any futures. It allows the user to set thespread value that determines the value of back-month futures used todetermine options spreads. If necessary, this rule can be used tomanually match the front-month future price. A/c/e Bid and Ask pricescan be followed or alternative Bid and Ask prices may be used.

In one embodiment of the market maker station, the market overviewscreen, as shown in FIG. 5A, displays both the best bid and ask (aswould be displayed to the subscriber) as well as the market makers' ownbid and ask. Color coding is preferably used to indicate whether themarket maker's own bid (ask) is at or below (above) the best bid (ask).FIG. 5B illustrates how this information is displayed on the Quote Entrywindow, used by the market maker to send binding quotes into the market.

In another embodiment, the market maker station is a gateway applicationconnecting a market maker's internal network to the LD network. In thiscase, the functions of the market maker station are controlled by otherapplications running within the market maker's internal network. Theseapplications may be trading front-ends or trading programs used toaccess the LD network. In this case, the LD market maker gatewayprovides a protocol for passing messages between the networks. Thesemessages include receiving and responding to requests for indicative andbinding quotes.

A network managing station has hardware and software to a directory ofparticipants receiving and providing quotes. The network managingstation consists of hardware (for instance, Windows-based servers) thatruns application software that validates and coordinates the use of theLD network. Each subscriber and market maker station connects to thenetwork managing station for the purpose of logging in. When marketmakers connect, they provide a list of products that they are interestedin quoting. When subscribers connect, they provide a list of productsthey are interested in trading. This list of products and participantsis updated as users log in/out or change their product list. As thislist changes, the network managing station notifies the participants.This allows each participant to respond accordingly. In one embodiment,the network managing station is not directly involved in the requestingof binding quotes, or sending quotes and orders to Exchanges, but rathermonitors this activity and maintains an audit trail for review purposes.Depending upon the rules and regulations of a specific Exchange,however, the network managing station may serve as central matchingutility, collecting orders and binding quotes from participants andtransmitting matched trades to an Exchange for clearing.

An Exchange may be any listed Exchange or over-the-counter (OTC) entitythat pluralities of LD participants agree is a suitable medium fortransacting and clearing trades. An Exchange may have a central orderbook and regulations that require all orders to be matched on a“price-time” priority basis, or it may allow block trades to betransmitted and cleared outside of the central order book. In certaincases, an “Exchange” may consist of only a price reporting agency and aclearing house.

Those skilled in these arts will recognize a variety of systemarchitecture, interphase devices, communication links, data managementsystem and enabling software to carryout the invention. The networktechnology used for this invention may be Local Area (LAN), Wide Area(WAN), wireless, Internet or Intranet, or a combination of all theseapproaches. Message protocols may be based upon TCP/IP with additionalfunctionality from Microsoft's Message Queue, but an XML-based protocolprovides maximum flexibility and is preferred. Front-ends may includecustom software programmed in Microsoft Visual Basic, Microsoft C++, andJava. Alternately a browser-based version can be implemented in HTML forplatform-independent use. The market maker station users Microsoft SQLServer 7.0, but is portable to Oracle, Sybase, or SQL Server 2000. Theabove description is intended to illustrate the invention and not tolimit it in spirit or scope.

1. A server for facilitating trading derivatives over a network, theserver being coupled with a network and comprising: means for receiving,by the server, a request for an indicative quote from a requestor, forat least one product of a plurality of products from a particularresponder station of a plurality of responder stations; means fortransmitting the request for an indicative quote, by the server, to theparticular responder station of a plurality of responder stations; meansfor receiving, by the server, a request for a binding quote from arequestor, for at least one product of a plurality of products from aparticular responder station of a plurality of responder stations; meansfor transmitting the request for a binding quote, by the server, to theparticular responder station of a plurality of responder stations;whereby the requestor may cause transmission of the request for anindicative quote for the at least one product via a computer networksystem to the particular responder station of the plurality of responderstations, the remaining of the plurality of responder stations notreceiving the request for an indicative quote; means for receiving, bythe server, an indicative quote in response to the request forindicative quote, from the particular responder station for only the atleast one product and subsequently receiving a subsequent indicativequote superseding the previous indicative quote; means for transmittingthe indicative quote, by the server, to the requestor, and subsequentlytransmitting the subsequent indicative quote superseding the previousindicative quote; means for receiving, by the server, a binding quote inresponse to the request for binding quote, from the particular responderstation for only the at least one product; and means for transmittingthe binding quote for only the at least one product, by the server, tothe requestor.
 2. The server of claim 1 wherein the subsequentindicative quote is different than the previous indicative quote.
 3. Theserver of claim 1 wherein the particular responder station provides thesubsequent indicative quote upon the elapse of a period of time.
 4. Theserver of claim 1 wherein the particular responder station provides thesubsequent indicative quote based on the occurrence of an event.
 5. Theserver of claim 1, further comprising means for indicating a pluralityof products for which the responder associated with the particularresponder station is interested in quoting.
 6. The server of claim 1,wherein the identity of the particular responder station and requestorare substantially anonymous.
 7. The server of claim 1, further comprisesmeans for polling a plurality of responder stations, each associatedwith a different responder possibly interested in quoting for the atleast one product and evaluating the responses thereto.
 8. The server ofclaim 1, further comprising: means for storing a record of the requestfor indicative quote and the request for binding quote generated by therequestor in an audit database; and means for monitoring the network forrequests for indicative quotes, requests for binding quotes, indicativequotes and binding quotes, and updating the audit database basedthereon.
 9. The server of claim 1, further comprising: means forreceiving at least one of the binding quote from the at least oneresponder station and transmit an order based thereon via the network toan exchange for clearing and confirmation; and wherein the serverfurther comprises: means for receiving the order via the network forclearing and confirmation.
 10. A method for trading derivatives, themethod comprising: receiving, by a computer, a request for an indicativequote from a requestor, for at least one product of a plurality ofproducts from a particular responder station of a plurality of responderstations; transmitting the request for an indicative quote, by thecomputer, to the particular responder station of a plurality ofresponder stations; receiving, by the computer, a request for a bindingquote from a requestor, for at least one product of a plurality ofproducts from a particular responder station of a plurality of responderstations; transmitting the request for a binding quote, by the computer,to the particular responder station of a plurality of responderstations; whereby the requestor may cause transmission of the requestfor an indicative quote for the at least one product via a computernetwork system to the particular responder station of the plurality ofresponder stations, the remaining of the plurality of responder stationsnot receiving the request for an indicative quote; receiving, by thecomputer, an indicative quote in response to the request for indicativequote, from the particular responder station for only the at least oneproduct and subsequently receiving a subsequent indicative quotesuperseding the previous indicative quote; transmitting the indicativequote, by the computer, to the requestor, and subsequently transmittingthe subsequent indicative quote superseding the previous indicativequote; receiving, by the computer, a binding quote in response to therequest for binding quote, from the particular responder station foronly the at least one product; and transmitting the binding quote foronly the at least one product, by the computer, to the requestor. 11.The method of claim 10 wherein the subsequent indicative quote isdifferent than the previous indicative quote.
 12. The method of claim 10wherein the particular responder station provides the subsequentindicative quote upon the elapse of a period of time.
 13. The method ofclaim 10 wherein the particular responder station provides thesubsequent indicative quote based on the occurrence of an event.
 14. Themethod of claim 13 wherein the event comprises a change in the marketfor the at least one product.
 15. The method of claim 10, furthercomprising indicating a plurality of products for which the responderassociated with the particular responder station is interested inquoting.
 16. The method of claim 10, wherein the identity of theparticular responder station and requestor are substantially anonymous.17. The method of claim 10, further comprises polling a plurality ofresponder stations, each associated with a different responder possiblyinterested in quoting for the at least one product and evaluating theresponses thereto.
 18. The method of claim 10, further comprising:storing a record of the request for indicative quote and the request forbinding quote generated by the requestor in an audit database; andmonitoring the network for requests for indicative quotes, requests forbinding quotes, indicative quotes and binding quotes, and updating theaudit database based thereon.
 19. The method of claim 10, furthercomprising: receiving at least one of the binding quote from the atleast one responder station and transmit an order based thereon via thenetwork to an exchange for clearing and confirmation; and wherein theserver further comprises: receiving the order via the network forclearing and confirmation.
 20. A system for trading derivatives, thesystem comprising: a network; a network managing station coupled withthe network and operative to receive a request for an indicative quotefrom a requestor, via the network, for at least one product of aplurality of products from a particular responder station of a pluralityof responder stations, transmit the request for an indicative quote, viathe network, to the particular responder station of a plurality ofresponder stations, receive, via the network, a request for a bindingquote from a requestor, for at least one product of a plurality ofproducts from a particular responder station of a plurality of responderstations, and transmit the request for a binding quote, via the network,to the particular responder station of a plurality of responderstations; whereby the requestor may cause transmission of the requestfor an indicative quote for the at least one product via the network tothe particular responder station of the plurality of responder stations,the remaining of the plurality of responder stations not receiving therequest for an indicative quote; the network managing station beingfurther operative to receive, via the network, an indicative quote inresponse to the request for indicative quote, from the particularresponder station for only the at least one product and subsequentlyreceiving a subsequent indicative quote superseding the previousindicative quote, transmit the indicative quote, via the network, to therequestor, and subsequently transmit the subsequent indicative quotesuperseding the previous indicative quote, receive, via the network, abinding quote in response to the request for binding quote, from theparticular responder station for only the at least one product, andtransmit the binding quote for only the at least one product, via thenetwork, to the requestor.